Brazil’s stock exchange plays catch up

Even though the Brazilian stock exchange, BM&FBovespa, ranks by market capitalisation among the top exchanges in the world, it is still lagging way behind its full potential.

Currently, there are only 470 companies listed from a country with the world’s seventh largest gross domestic product. In contrast the UK, with a similar-sized economy, has about 3000 companies listed on the London Stock Exchange's main and alternative investment markets. Attempts by Brazil to set up a small cap market – Bovespa Mais – have so far attracted only one listing, agricultural inputs manufacturer Nutriplant.

But Brazilian bankers think all this is set to change as the country’s entrepreneurs start to recognise the benefits of listing and move away from raising capital from their own resources or bank loans. At present many companies are constrained by lack of capital.

Raising output

“In the 1990s, when Brazilian companies reached capacity the first thing they thought of was to raise prices; now they are saying 'let’s raise output instead' because they don’t want to lose market share," says José Olympio, managing director and co-head of the investment banking division of Credit Suisse in Brazil. 'That’s a fundamental change in the way business is run. Companies are becoming more formalised and the attractions of the capital markets are pushing them to be more open and transparent.”

“But what you also need are investors who are willing to buy small companies. So far the market [has been] more interested in large companies and is placing a high value on liquidity and is less interested in smaller floats,” he adds.

“International investors are however interested in $70m initial public offerings [IPOs] in India and the US, so this must also be possible in Brazil. So far the right companies haven’t yet tested the market. If a $100m high-growth company decides to go to the market, it will get support. So far this hasn’t happened.”

Consumers, infrastructure, commodities

Hans Lin, managing director of investment banking at Bank of America Merrill Lynch in Brazil, says: “There are three key themes in Brazilian capital markets – the domestic consumer story, infrastructure and commodities. But in Brazil, because of the high interest rates, more of the savings are invested in fixed income rather than equity. Domestic equity investment is going to grow but a lot of the demand currently is coming from international investors.”

The message is starting to get through both in terms of supply and demand. In terms of the domestic consumer story, three IPOs over the past six months are of note – household appliance retailer Magazine Luiza, shoe store chain Arrezo and drugstore Droga Raia.

Huge potential

On both sides of the equation, executives at BM&FBovespa have a plan to improve the situation. José Antonio Gragnani, BM&FBovespa's chief business development officer, says: “We have done an analysis of the potential for listing on the exchange. In Brazil we have 3000 companies with revenues above 400m reais per year and 15,000 companies with revenues between 100m and 400m reais per year. We have only 470 companies listed but the potential is huge.

“We now have to create the right environment and convince entrepreneurs of the benefits of doing an IPO.”

Plans include giving a new push to the Bovespa Mais as well as education initiatives to explain the benefits of listing to entrepreneurs. On the retail side, everyone recognises that an equity culture will only really take off when interest rates are lowered – Brazil currently only has 600,000 retail investors out of a population of 190 million. The launch of a TV advertising campaign to encourage investment featuring Brazilian football legend Pelé shows just how seriously the authorities are taking the matter.